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In what type of strategy has the investor engaged?

05 / 03 / 2018 Assignment

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An investor owns a share of 3M (originally purchased at $55) and writes a call option
on the same stock and sells it for $3.00 with an exercise price of $55.

a. In what type of strategy has the investor engaged?

Answer
This strategy is known as "Covered Call", when investor write a call on an
asset together with buying the asset.
b.Construct a table showing the profit (loss) to the investor assuming the following stock
prices when the call option expires: $30, 35, 40, 45, 50, 55, 60, 65, 70. (Note you must
consider both the profit (loss) on the 3M stock and the option.)

exercise
selling cost

$55.00
$3.00

Answer
Stock Price
profit

$30.00
$(22.00)

$35.00
$(17.00)

$40.00
$(12.00)

$45.00
$(7.00)

$50.00
$(2.00)

$55.00
$3.00

$60.00
$3.00

$65.00
$3.00

$70.00
$3.00

c. Now assume instead of writing a call option, the investor bought a put option at th+A47e
same price. What type of strategy is this?

Answer
Protective Put strategy that aim to guarantee minimum proceeds equal to the put’s
exercise price.

d. Given (c) above, construct a table showing the investors profit (loss) assuming the
following stock prices when the put option expires: $30, 35, 40, 45, 50, 55, 60, 65, 70.
(Note you must consider both the profit (loss) on the 3M stock and the option.)

exercise
selling cost

$55.00
$3.00

Answer
Stock Price
profit

$30.00
$(3.00)

$35.00
$(3.00)

$40.00
$(3.00)

$45.00
$(3.00)

$50.00
$(3.00)

$55.00
$(3.00)

$60.00
$2.00

$65.00
$7.00

$70.00
$12.00


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